Issue No. 909

Where Are My Planes

Airlines Face Capacity Scarcity Amid Aircraft and Engine Shortage

Pushing Back: Inside the Issue

There’s lots of nervous talk about the trajectory of the global economy, perhaps with some justification given rising interest rates, banking stress, lingering inflation, ongoing geopolitical tensions, weak freight markets, and cooling labor markets. There’s a more optimistic scenario, however, and airlines are feeling it. Travel demand, for one, remains almost universally strong, with even China now finally joining the party. The average price of U.S. Gulf Coast jet fuel in April was down 39 percent year-over-year. Oil prices have dropped to a level consistent with earlier periods of healthy economic growth — and yes, there’s a correlation. A strong U.S. dollar, which greatly pressured global governments and companies including airlines, has now depreciated significantly against most major currencies. What’s not to like?

Sure enough, most major airlines reporting their first quarter results have a good story to tell. IAG just raised its profit forecast. So did Air Canada. Chinese low-cost carriers are making money again, with their bigger brethren likely not far behind. Both of Japan’s leading airlines posted operating profits. So did Korean Air and Latam. And Turkish Airlines? Somebody needs to make a Hollywood movie about its stunning expansion — and yes, it made money too last quarter. The airline business is a perennially fragile one. But as things stand now, conditions look rather healthy.

Airlines are not happy, however, with severe aircraft and engine shortages — read our feature story below for more about that. One hapless airline — India’s GoFirst — cited engine issues as the reason it was forced to file for bankruptcy last week.

Bankruptcy is certainly not a concern for Australia's Qantas, thanks to the impressive legacy of Alan Joyce — listen to the Airline Weekly Lounge podcast for more about that.

Note: For more commentary, follow Airline Weekly’s Edward Russell and Jay Shabat on LinkedIn. And be sure to answer Jay's Daily Poll Question.

Airline Weekly Lounge Podcast

Alan Joyce took over Qantas just as the Great Recession descended in 2008. He set about turning around its money-losing longhaul business, forging new international ties, and cementing Qantas' dominance of the Australian domestic market. Edward Russell and Jay Shabat discuss Joyce's legacy and the challenges that confront incoming CEO Vanessa Hudson. Plus, Lufthansa's somewhat concerning first-quarter results.

Weekly Skies

There are few airlines that are held as high in the national consciousness as Qantas Airways is in Australia. That’s why the airline’s first new CEO in 15 years is such a big deal.

Alan Joyce, Qantas CEO since 2008, will pass the reins to group veteran Chief Financial Officer Vanessa Hudson in November. She will inherit an airline that is not only an iconic national brand but one that has emerged strong from the pandemic. During the first six months of the Qantas 2023 fiscal year, the airline posted an A$1.5 billion ($1.1 billion) operating profit and a 16 percent operating margin, besting its results in 2019. The airline expects a profit for the full fiscal year that ends in June.

Hudson will also, notably, be the airline’s first female CEO. And it will be the first time in Australian aviation history that the country’s two largest airlines, Qantas and Virgin Australia, are led by women. Jayne Hrdlicka leads Virgin Australia.

“This is an exceptional company full of incredibly talented people and it’s very well positioned for the future,” Hudson said in a statement. “My focus will be delivering for those we rely on and who rely on us – our customers, our employees, our shareholders, and the communities we serve.”

But credit for the strong Qantas that Hudson is set to inherit rests with Joyce. During his 15-year tenure at the helm of the airline, he fundamentally changed Qantas into a profitable aviation powerhouse — even if some contemporary travelers are grumpy with its customer service. He led the group’s domestic business from strength to strength, including forcing its main competitor Virgin Australia into administration in 2020. And Joyce is also credited with the success of Jetstar Airways, Qantas’ budget subsidiary, which he launched in 2003 and led until 2008. Jetstar continues to be a key lucrative piece of the Qantas Group.

Turning around Qantas’ longhaul international business was a cornerstone of Joyce’s legacy. When he took the helm of the airline during the Great Recession in 2008, longhaul flying was a money losing venture for Qantas. Its international business lost A$1.4 billion from fiscal year 2011 — when Qantas began breaking out results for its international business — through 2014. It turned a small A$267 million profit in the fiscal year ending June 2015.

Key to the international turnaround were new partnerships. After years of blaming, in part, increased international competition for the airline’s own poor longhaul results, Joyce changed tune and forged a partnership with Emirates in 2013. That pact allowed Qantas to restructure its operations to Europe, keeping just flights to London while shifting everything else to connections on Emirates via Dubai. Qantas has pursued similar partnerships with American Airlines in the U.S. — though that pact was not approved until 2019 — and Latam Airlines in South America in the years since.

Joyce’s turnaround of Qantas’ longhaul business set the stage for many of the initiatives that Hudson inherits. Top of the list is Project Sunrise, which will see the airline launch two of the world’s longest nonstop passenger flights between Sydney and both London Heathrow and New York JFK around 2025. Qantas has ordered 12 Airbus A350-1000s for the new ultra longhaul routes. The new nonstops will build on the existing flights to London from Perth that began in 2018, and the planned nonstop to New York from Auckland that begins in June. Hudson will take over Project Sunrise, which will test travelers’ appetite for very, very long flights.

Hudson will also need to manage Qantas’ international partnerships. Key is its joint venture with American, which has grown in importance during the pandemic as travel between the U.S. and Australia was one of the first transpacific markets to reach near recovery after Australia ended border restrictions in early 2022. In the second quarter, Qantas capacity between the U.S. and Australia is down 37 percent compared to 2019 levels — largely due to the late arrival of new Boeing 787s — while American capacity is up nearly 7 percent, according to Diio by Cirium schedules. Despite the lower capacity, Qantas has added one new U.S. route to its map since the pandemic: Melbourne to Dallas-Fort Worth, which is American’s largest hub.

More recently, Joyce is credited with Qantas’ successful navigation of the Covid-19 pandemic that all but shut down global air travel. The airline was lifted, in part, by its highly-profitable loyalty program that continues to generate 20 percent-plus profit margins for the group. But he has come under criticism from travelers over his handling of operational issues that plagued the airline last year, and a perceived worsening in customer service.

Restoring Qantas’ historic operational reliability and perceived customer service levels will be an immediate challenge for Hudson. Joyce, during the carrier’s most recent earnings call in February, highlighted aircraft delivery delays at both Airbus and Boeing, and staffing and training issues as two of Qantas’ most pressing issues. The former is not expected to ease until at least the end of this year, which raises questions about the delivery timeline of the airlines’ narrowbody refleeting with new Airbus A220s and A321neos that are due to begin arriving during the fiscal year ending in June 2024. Staffing issues are also expected to abate in the 2024 fiscal year.

Hudson, as a finance executive, is seen as well prepared to manage Qantas’ fleet renewal. Aircraft capital expenditures through fiscal 2026 are estimated at $5 billion, and investors and analysts will be watching closely how the airline pays for the planes while maintaining investment-grade credit metrics.

Edward Russell

Lufthansa Bullish on Summer

Things are looking up in Frankfurt. The Lufthansa Group, Europe’s largest network carrier, sees all the elements falling into place for a significant improvement in operating profits this year.

Travel demand remains robust. Cost pressures are easing despite significant investments in operational aspects of the business to avoid a repeat of last summer’s rampant flight delays and cancellations. And the group sees a permanent shift to more premium leisure travel that supports its big investment in new first, business, and premium economy cabins dubbed Allegris.

“The Lufthansa Group is on track,” CEO Carsten Spohr said during a first-quarter earnings call last week. The group posted an adjusted €273 million ($302 million) operating loss, and €467 million net loss, in the first quarter; not an unusual result for the weakest three months of its year. Its operating margin was negative 3.9 percent.

Lufthansa, however, sees money to be minted this summer. Spohr said the group is “on the verge of the strongest summer in our company’s history in terms of traffic revenue.” Yields, a proxy for airfares, are forecast up roughly 25 percent over 2019 levels in the second quarter; for comparison, yields were up only 10 percent from 2019 levels during the June quarter last year. The only area of demand weakness is in corporate travel, which at the end of the first quarter was down 40 percent on volume and 30 percent on revenue from four years earlier.

The group anticipates an adjusted operating profit of more than €754 million — its result in 2019 — during the second quarter. Its full-year adjusted operating result outlook is more than €1.5 billion is unchanged, though analyst consensus has risen to roughly €2.2 billion for the year — an estimate that Chief Financial Officer Remco Steenbergen declined to affirm or reject.

But Lufthansa’s forecasted summer revenues are not solely the result of torrid demand. The airline industry’s capacity constraints, including labor and, increasingly, aircraft availability, mean carriers will fly less — in some cases a lot less — than they want. More travelers and not so much more capacity means airfares, and yields, will rise.

“I’ve been around 30 years in this industry, [and] I’ve never seen anything like it — basically spare parts are missing,” Spohr said. He referred specifically to the issues plaguing Pratt & Whitney geared turbofan engines on Airbus A220 and A320neo family aircraft. The Lufthansa Group currently has three A320neo family planes, and a third of Swiss International Air Lines‘ 30 A220s parked due to the shortage in spare parts for their P&W engines, Spohr added.

In India, Go Air filed for bankruptcy last week citing losses that stemmed from the delay of P&W-equipped A320neo family aircraft. In the U.S., Hawaiian Airlines has five of its 18 A321neos on the ground awaiting parts, and Spirit Airlines has had to cut its capacity outlook for the rest of the year due to grounded A320neos awaiting parts. And in Europe, AirBaltic has resorted to wet-leasing aircraft to make up for the number of A220 aircraft it has parked awaiting parts.

There is a “global shortage of spare engines,” Air Lease Corp. CEO John Pleuger said Monday. Efforts to address this by P&W and other engine suppliers, he added, has diverted production capacity from engines for new aircraft, further delaying deliveries from both Airbus and Boeing.

Lufthansa executives did not comment on how many of its own new aircraft deliveries could be delayed this year. However, Spohr did say the airline plans to debut its new Allegris premium cabins on the 787 in the fourth quarter.

The Lufthansa Group maintains its 2023 capacity forecast of 85-90 percent of 2019 levels. Second quarter capacity will be roughly 82 percent of levels four years ago, or an 8.5 percentage point improvement from a year ago.

One benefit for Lufthansa this summer is the return of its Airbus A380s in June. The decision last year to return the 509-seat superjumbos to service was made with the view that the airline needed the capacity lift to meet travel demand amid aircraft delivery delays, particularly of Boeing’s new 777-9. Lufthansa will reintroduce the A380 on flights from Munich to Boston on June 1, and to New York JFK on July 4, according to Diio by Cirium schedules.

Lufthansa continues to negotiate with the Italian government on its planned purchase of ITA Airways, Spohr said. If finalized, Rome would be a strategically important southern European hub for flights to Africa and Latin America for the group that now counts Zurich as its furthest base south. And the airports in both Milan and Rome have excess capacity that gives the Lufthansa Group needed opportunities to grow. One thing that Spohr was clear about is that the group does not intend to turn ITA into a dominant force in the Italian domestic market, which is now dominated by budget airlines and train services.

“The Italian government clearly considers the Lufthansa Group as the best home that will ensure a good future for its national airline. Our talks here are on the right track,” he said. The deadline for a deal was recently pushed back to May 12.

In the first quarter, the group’s passenger airlines posted a combined €512 million adjusted operating loss, or half the loss a year ago. Only Swiss was in the black with a €77 million adjusted operating profit. Lufthansa Cargo and Technik also reported profits during the period. Unit revenues (RASK) were up 25 percent compared to 2019, and unit costs (CASK) excluding fuel and currency were down slightly year-over-year but up nearly 18 percent from four years earlier.

Edward Russell

Iberia Leads IAG’s Winter Profits

When it comes to Europe’s Big Three Airlines, it’s not even close: International Airlines Group — the owner of British Airways, Iberia, Aer Lingus, Vueling, and Level — is consistently the most profitable. This was true again in the first quarter of 2023, with the Lufthansa Group and Air France-KLM both reporting red ink at the operating level (margins of negative 4 percent and negative 5 percent, respectively). IAG on the other hand, eked out a small first quarter operating profit, a commendable achievement for the slowest period of the year.

Iberia led the way with a positive 5 percent operating margin, up from negative 2 percent in 2019. It saw “strong leisure demand in all regions.” The Madrid-based airline is also seeing a faster pace of recovery in business travel than at other airlines. Iberia’s specialty is Latin America, where it competes most directly with Air Europa, an airline IAG will acquire if regulators allow. IAG chief Luis Gallego said during Friday’s earnings call that the regulatory review process should take about 18 months. In the meantime, Iberia is also strengthening its U.S. network in part by adding capacity through increases in aircraft utilization.

British Airways earned a first quarter operating profit as well, albeit just barely (its 2019 operating margin was much better, at positive 8 percent). The carrier was always more dependent on corporate travel, which IAG fears will never come back to quite where it was in 2019. “We don’t think that corporate travel will get back to 100 percent,” Chief Financial Officer Nicholas Cadbury said. He gave a level of around 80 percent as the most likely scenario, and “probably at the lower end of that range for this year in British Airways.”

But leisure demand is strong at British Airways, and just as Iberia’s core South Atlantic franchise is performing well, so is British Airways’ core North Atlantic franchise. This franchise, don’t forget, benefits from a close revenue-sharing joint venture with American Airlines. By all industry accounts, North Atlantic markets will produce exceedingly strong profits this summer, which should translate to strong second and third quarter profitability for British Airways.

That’s also the case for Aer Lingus, even more dependent on North Atlantic markets. Its first quarter operating margin was an unsightly negative 23 percent, substantially worse than the negative 9 percent it reported for the same quarter of 2019. But it’s well positioned to recover these early-year losses thanks to robust leisure demand originating in the U.S. Shorthaul leisure routes are booking well too. Aer Lingus is feeling a pinch, however, from a sizable exposure to tech sector travel, which is currently weak.  

Finally, with respect to Barcelona-based Vueling, its first quarter operating margin improved from negative 17 percent in 2019 to negative 12 percent in 2023. Vueling’s business is also highly seasonal, yet it reduced first-qiarter losses thanks to well-performing winter sunshine markets like the Canary Islands and Egypt. The LCC is also enjoying solid gains in ancillary revenues and mitigating offpeak losses is a high priority (having a more consistent flight schedule across seasons can also help with operational performance). Vueling, however, given Barcelona’s proximity to France, has been “significantly disrupted” by a wave of French air traffic controller strikes. These have also caused headaches for British Airways, which is simultaneously dealing with constrained capacity at London Heathrow.

One important driver of IAG’s first-quarter operating profit was cheaper fuel. The company said the average spot price of jet fuel during the quarter was $910 per metric ton, down approximately 5 percent from the same quarter a year ago. Prices dropped as the quarter progressed, peaking at $1,140 per metric ton in late January but falling sharply to $805 per metric ton at the end of March. IAG has roughly 60 percent of its expected fuel needs hedged at about $810 per metric ton. Another contributor to the company’s first-quarter strength, importantly, was its Avios loyalty program.

IAG is cautious about what might become of the economy, what might happen with fuel prices, and what operating conditions might be this summer, given further threats of strikes and airport staffing shortages. But for now, it’s raising its full-year profit guidance based on what it sees from forward bookings. “We see strong demand everywhere.”

Jay Shabat

ANA, JAL Beats Forecasts

All Nippon Airways and Japan Airlines beat profit expectations during the fiscal year ending in March as international travel demand rebounded. Inbound international travel demand increased “dramatically” in the fourth quarter, ANA said. This helped propel its full year operating profit 120 billion Japanese yen ($875 million), and operating margin to 7 percent. In February, ANA forecast a roughly 90 billion Japanese yen operating profit and margin of around 5.6 percent. The airline reported a net profit of 90 billion Japanese yen for the year ending in March.

JAL saw similarly strong demand for international travel but focused on high yields for connecting services between North America and Asia via Tokyo’s Narita airport. It expects this trend to continue citing the easing of travel restrictions to China. JAL posted a 64.5 billion Japanese yen operating profit, or a 34.4 billion yen net profit, and a 4.7 percent margin. That beat its forecast of a 50 billion yen operating and 25 billion yen net result from February. However, JAL’s results did not beat its original 80 billion yen operating and 50 billion yen net forecast from earlier in the fiscal year.

The turnaround is good news for Japan’s big two airlines. Unlike competitor Korean Air, which posted profits on the back of strong cargo demand throughout the pandemic, travel restrictions and a smaller cargo business kept ANA and JAL in the red for two years. However, beginning in October, Japan ended its final Covid entry restrictions and lifted caps on inbound tourist numbers. That allowed travel to the country to surge, even during the historically lower demand winter season.

The number of visitors entering Japan has picked up dramatically since October. Nearly 1.48 million foreign visitors entered the country in February, according to the latest data available from Japan National Tourism Organization. That is equal to 57 percent of 2019 levels, and a dramatic 48 point rebound since September.

ANA recovered to nearly 68 percent of its pre-pandemic international capacity in the March quarter. Traffic recovered to 65 percent of 2019 levels, and all-important yields were 45 percent above four years earlier.

JAL, on the other hand, flew 94 percent of its pre-pandemic capacity (measured in ASKs) in the March quarter. Passenger traffic was 88 percent recovered. International yields were up 37 percent, while domestic yields were roughly flat.

Looking ahead, ANA expects strong inbound visitor demand to Japan in its 2023 fiscal year that ends next March. Outbound travel demand is forecast to “recover gradually;” something that has hit carriers dependent on Japanese travelers, Hawaiian Airlines for example, particularly hard. ANA expects international passenger numbers to rise to roughly 80 percent of 2019 levels by the March quarter of 2024, and domestic passenger numbers to plateau at around 95 percent.

ANA forecasts a net profit of roughly 80 billion Japanese yen in the 2023 fiscal year. It anticipates a 140 billion yen operating result and a 7.1 percent operating margin. One challenge for ANA this year, as for nearly every other airline, is rising costs. Expenses are forecasted to rise at least 15 percent year-over-year.

JAL forecasts continued strong international and connecting demand driving a 55 billion yen net profit during the 2023 fiscal year that ends next March. It anticipates a 100 billion yen operating profit.

Edward Russell

First-Quarter Earnings Round Up

  • It’s now beyond dispute: Chinese tourism is back, at least domestically. The South China Morning Post reported that 247 million people traveled by air, rail, waterway, or road within or out of mainland China during the Golden Week holiday at the start of May. That number, the Post points out, is equivalent to the entire combined populations of Japan, Australia, the UK, and the American cities of Los Angeles, Houston, Chicago, and Phoenix. With travel spending up less than travel volumes, questions remain about the vigor of China’s post-Covid economic rebound, and what it means for global economic growth. For airlines though, recovery is clearly underway, evident even during the first quarter. Air China and China Eastern again reported steep quarterly losses, plagued by heavy exposure to intercontinental markets which are still depressed. The two carriers posted negative 14 percent and negative 16 percent first quarter operating margins, respectively. The more domestic-oriented China Southern, however, held its margin deficit to just negative 5 percent. For Hainan Airlines, it was just negative 1 percent. And the LCCs Spring and Juneyao were already back in the black last quarter, with margins of positive 10 percent and positive 6 percent, respectively. It certainly didn’t hurt that fuel prices fell throughout the quarter. With domestic travel now roaring back this quarter, expect much more black ink from Chinese airlines in the next reporting season.
  • During the dark days of the pandemic, Korean Air‘s lights shined bright. The carrier was in fact more profitable than ever during the crisis, and in some quarters more profitable than any other passenger-focused airline worldwide. The secret to its success was its large cargo business, which boomed during the pandemic. That’s now cooled, but Korean Air continues to deliver strong if not quite so spectacular profits. Its first quarter operating margin was 13 percent. Cargo accounted for a third of total revenues in the quarter, compared to 77 percent during the same period last year. The cargo business is now dealing with “low demand.” But passenger demand has recovered strongly, boosted by the reopening of China and Japan. Passenger load factor in the first quarter rose to 82 percent. Longhaul demand is strong. Leisure demand is strong. Shorthaul demand is improving. Sixth-freedom transit demand through Seoul is strong, notably linking the Americas and Southeast Asia (think Vietnamese and Filipino Americans flying to visit family). One final travel restriction not yet lifted in the first quarter was China’s ban on overseas group tours. Korean Air is undertaking some major strategic moves, most importantly its planned takeover of rival Asiana, pending regulatory consent (specifically from the U.S., the EU, and Japan). It’s also adding lie-flat seats to some of its narrowbody planes and developing its joint venture with Delta.
  • Speaking of Delta joint ventures, before the pandemic few imagined that Latam, South America’s largest airline, would ever go bankrupt. It was known as one of the industry’s profit leaders for many years. Lo and behold, with its passenger business devastated by Covid and government assistance largely unavailable, Latam joined other Latin American carriers like Aeromexico and Avianca in U.S. bankrupt courts. Bankruptcy restructurings are never easy, but in Latam’s case, the proceedings helped it achieve an impressively low non-fuel cost structure, one even lower than what it had in 2019, never mind all the general inflation that’s ensued since. This helped it achieve an almost 11 percent first quarter operating margin, up from just 3 percent in the same quarter of 2019. Latam is a big cargo player, and cargo demand has weakened. But passenger demand is strong, notably on longhaul routes including those to the U.S. and Europe. The one major exception is routes involving Peru, due to social unrest. In Brazil, Latam’s largest market, the carrier is benefitting from a benign competitive situation, with Azul and Gol its only main rivals. Those two airlines, incidentally, did not go through bankruptcy and are thus still plagued by heavy debts. Latam for its part currently has no significant non-fleet debt maturities in the next 4 years. Post-bankruptcy, the Cueto family behind Latam owns just 5 percent of the airline (down from 16 percent). Delta and Qatar Airways each own 10 percent (down from 20 and 10 percent, respectively). The carrier’s largest shareholder, which used to be Delta, is now the investment firm Sixth Street, with 28 percent. Delta is a key strategic partner too; the two airlines have a new joint venture emanating from Latam’s pre-pandemic decision to ditch its old partner American. The new JV will soon launch two new routes, namely Sao Paulo-Los Angeles and Bogota-Orlando. Brazil, Chile, Colombia, and Peru are Latam’s Big Four markets, having closed its Argentine venture several years ago. One analyst wondered whether it might look to Mexico next, perhaps teaming with Delta’s close ally Aeromexico.
  • The first-quarter earnings season is now finished in the U.S. Allegiant and Frontier both reported last week, finding themselves in very different situations. The former (based in Denver) posted a negative 3 percent operating margin, while the latter (based in Las Vegas) registered at positive 15 percent. Frontier for its part spoke of strong demand, thanks to people having more flexibility than ever to travel. Ancillary sales, a big part of its business model, were strong too. But non-fuel cost inflation is a problem. Frontier is now sacrificing some unit cost efficiency by adopting a new network strategy that complies with what it sees are altered travel patterns. More specifically, peaks are getting peakier and offpeak days even quieter. “By maximizing flying on peak days and peak periods and reducing underperforming flying in low demand periods, we believe we can generate better profitability with less flying, thus derisking our operations.” This will result in cutting some longhaul routes, which are operationally harder to schedule only on peak days. But even as this puts upward pressure on unit costs, Frontier expects to retain a major cost advantage versus peers. And more importantly, it expects to return to double-digit profit margins later this year.
  • As for Allegiant, its network always peaks in the first quarter, so no surprise to see it perform so well. Interestingly, it stressed the excellent level of profitability for its credit card product. Allegiant’s number one priority: new pilot and flight attendant contracts. Note that Allegiant like other carriers has felt compelled to trim capacity in an effort to preserve operational reliability. “This is a result of MRO delays for aircraft and heavy maintenance [and] pilot constraints, along with airport construction disruption and ATC delays in some key markets, particularly during peak travel days.” In other Allegiant matters, its new Sunseeker hotel will open this fall. The airline will go live with its new Navitaire reservation system this quarter. As of now, its first Boeing 737 Maxes will arrive at the end of this year. And it should soon (pending DOT approval and an upgrade to Mexico’s aviation safety rating) be able to start a joint venture with VivaAerobus.
  • Speaking of VivaAerobus, it lost money in the first quarter, just like its rival Volaris. Operating margin was negative 6 percent, better at least than the negative 15 percent it suffered in 2019. The LCC should perform well for the full year, now that the weak offpeak season is past. Mexico finds itself with a major opportunity to grow its economy, capturing manufacturing work currently done in China. Some however raise cautionary flags, citing infrastructure shortcomings, hostile federal government policies, and drug war violence.
  • Cebu Pacific of the Philippines produced its first profitable quarter since the pandemic started. From January through March, Cebu’s operating margin was positive 6 percent. The airline said both passenger demand and ancillary demand was strong. “[Cebu] expects that in the second quarter, it will exceed its pre-pandemic capacity on a systemwide basis, supported by an optimistic outlook as the tourism industry continues to recover, plus the strengthening of its Clark and Cebu hubs.”

Jay Shabat

U.S. Airlines First-Quarter Earnings Scorecard

Jay Shabat

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State of the Unions

  • The Air Canada Pilots Association (ACPA) has voted to join the Air Line Pilots Association, in a significant move that makes the world’s largest pilots union even bigger. The roughly 4,500 members of ACPA voted 84 percent in favor of joining the larger union. ALPA must ratify the agreement in a May 17 meeting, and then collective bargaining rights for pilots at Air Canada and its low-cost subsidiary Rouge will transfer to the union.
  • Southwest notched a labor achievement and setback last week. The Dallas-based carrier’s 12 meteorologists represented by the Transport Workers Union ratified a new five-year accord last week; the deal is important given the role severe weather had on the airline’s December holiday meltdown. The same week, the Southwest Airlines Pilots Association began a strike authorization vote that will continue through May 31. The vote, while a step towards a strike, is considered more of a negotiating tactic than an actual declaration of labor action.
  • And speaking of strike authorizations, pilots at American represented by the Allied Pilots Association voted in favor of such an authorization last week. Again, the approval is seen more of a negotiating tool in the APA’s on-going contract talks with the airline. After pilots at Delta authorized a strike last fall, ALPA and the airline reached an agreement in principal within several weeks.

Edward Russell

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Routes and Networks

  • Delta last week called for the Department of Transportation to grant U.S. airlines limited flexibility in the gateways for their Tokyo Haneda slots. The proposal seeks a three-year trial where each U.S. airline with Haneda slot pairs — American, Delta, Hawaiian Airlines, and United — would have flexibility to change the gateway for two of those pairs. Why? A “starkly different” demand environment, particularly for corporate travel, as a result of the Covid-19 pandemic. Delta said passenger traffic was only at 49 percent of 2019 levels during the year ending in March; however, the airline’s argument includes the months before Japan eased inbound visitor restrictions in October, after which demand has surged (see Weekly Skies). American has already backed the proposal though DOT approval would likely require the support of all four airlines. Of the 18 Haneda slot pairs available for U.S. airlines Delta holds seven for flights from Atlanta, Detroit, Honolulu, Los Angeles, Portland, Ore., Minneapolis-St. Paul, and Seattle-Tacoma; United five pairs; American three pairs; and Hawaiian three pairs.
  • Staying in Asia, the DOT is allowing Chinese airlines 12 weekly flights to the U.S., up from eight. The move keeps the number of flights allowed by both Chinese and U.S. airlines balanced until the governments can either agree to restore the pre-pandemic bilateral agreement that allowed for up to 50 daily flights in December 2019, or reach a new pact. Air China, China Eastern, China Southern, and Xiamen Airlines, in addition to their U.S. competitors, are currently flying between the countries.
  • Route tidbits: Breeze Airways wants to fly the crowded Los Angeles-Los Cabos route weekly from November. If authority is granted by the DOT, Breeze would be the seventh U.S. carrier on the route. Flair Airlines will open a new three-aircraft base in Calgary in July with four new routes to Las Vegas, London, Ontario, Phoenix, and Puerto Vallarta opening through the fall.
  • And on the partnership front, AirBaltic and Turkish Airlines launched a new codeshare on May 1. The pact allows the former to connect travelers onto Turkish Airlines flights from its new nonstop to Istanbul, and the latter to connect travelers onto AirBaltic’s flight to Riga. And Alaska Airlines and regional Kenmore Air are partnering on flights between Paine Field, Wash., and both Friday Harbor and Eastsound in Washington’s San Juan Islands. Alaska serves Paine Field north of Seattle with 14 daily flights to seven destinations.

Edward Russell

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Feature Story

An airline is only as good as the airplanes it flies. Good news: Airbus and Boeing have a lineup of efficient planes that make money for airlines — planes with increasingly longer range, better fuel burn, improved comfort, lower emissions … But now the bad news: there’s not enough of them.

Three years ago, at the onset of a global pandemic, talk of an aircraft shortage was the farthest thing from anyone’s mind. With passenger demand for air travel roaring back, however, airlines need more capacity. Badly. Unfortunately, equipment makers and their suppliers can’t keep up, beset by a rash of production obstacles including labor shortages, parts shortages, supply chain disruptions, and certification delays.

Boeing’s recent discovery of quality defects on its popular 737 Max is only adding to the jet delivery delay dismay — and adding to the agonizing wait for new capacity. As Boeing remarked in its latest earnings call: “Unfortunately, the timing of these delivery shortfalls will impact summer capacities for many of our customers … we feel terrible about that.” American, for one, was recently forced to suspend some peak season flights to Spain because of delays receiving new 787s — with the transatlantic market currently booming, the timing couldn’t be worse. “Look,” said CEO Robert Isom last month, “at the end of the day, we need [Boeing and Airbus] to be incredibly reliable. We need to them to be better than what they’ve been … we need them to get their act together.”

Even more frustratingly for the industry, the latest generation of engines — while delivering lower fuel burn — aren’t meeting reliability standards. Air Lease Corp.’s Steven Udvar-Hazy, speaking in March, said “these new technology engines that power the 787, the A330neo, the 737 Max, the A320 and A321neo, all of those engines were developed 12- to 15-years ago,” intending to reduce fuel burn by about 15 percent while reducing carbon emissions and noise. “But to achieve that, all of the manufacturers — GE, Rolls-Royce, Pratt & Whitney, CFM — pushed technology to the outer end of the envelope in terms of the alloys, the heat in the engines and the efficiencies that they try to gain to achieve these objectives on fuel burn and environmental and noise. And so consequently, what we have today is engines that are delivering a 15 percent average reduction in fuel burn per seat, but the maintenance cost of these engines is far higher than what was originally projected because the engines do not stay on the wing in operational status as long as their predecessor engines.” He continued: “So engines come off, they have to go to the shop. They have to have new things to upgrade, whether it’s turbine blades or things in the combustor because they are coming out with product improvements and the airlines want these product improvements incorporated to extend the life of the engines, but that means the engines are on the ground. They have to go to the shop. There’s not enough shop capacity.”

AerCap’s Aengus Kelly said essentially the same in his company’s first-quarter earnings call last week: “These engines are masterpieces of engineering capability to reduce the fuel burn. The challenge is that in certain operating environments, they just don’t last as long on wing as was originally envisaged, and as the predecessor engines had lasted on wing.” He added: “This isn’t something that will go away in the next 12 or 24 months.”

Problems with Pratt & Whitney’s geared turbofan (GTF) engines, in particular, are wreaking havoc. India’s Go First, a low-cost carrier, filed for bankruptcy last week, blaming the 25 A320neos it was forced to ground due to “failing engines.” (Pratt for its part says the carrier’s problems run far deeper than just its engines). GTF-induced groundings have been a growing problem for many airlines, including Go First’s rival IndiGo, along with AirBaltic, Air New Zealand, Hawaiian Airlines, Lufthansa, and Spirit Airlines.  

The resulting shortage of aircraft is greatly influencing the current state of the airline economy. Combined with strong demand, the supply deficit is driving up industry fares and yields, to levels far above where they were in 2019. It’s driving up aircraft prices, of course, simultaneously. But for many airlines, yields have gone high enough to underpin a post-pandemic return to profitability. Indeed, IATA said in February that it expects the airline industry to collectively earn a net profit this year. One additional consequence of the aircraft shortage: It creates a big barrier for prospective startup airlines. Separately, it’s likely playing some role in encouraging consolidation — JetBlue cited access to Spirit’s Airbus orders as a reason for its takeover.  

How long will the aircraft supply shortage persist? For years, argue industry leaders like United’s Scott Kirby and Lufthansa’s Carsten Spohr. Aircraft, incidentally, are not the only thing in short supply. So are pilots, air traffic controllers, mechanics, capacity at key airports, training capacity, spare engines, engine parts, and aircraft maintenance facilities.

Last week, Airbus said it’s essentially sold out of planes for years — if you order an A320-family jet today, you won’t get it until 2029 at the earliest. The same is roughly true for Boeing and its Max. As ALC noted: “We fully expect delays to persist for several years as indeed one OEM [original equipment manufacturer] has advised us to expect delays compared to originally contracted delivery dates through 2028.” To help clear the big backlogs, Airbus aims to lift A320 production rates to 65 per month by the end of next year, rising to 75 in 2026. Boeing, meanwhile, eyes a production rate of 38 737 Maxes a month by year end, and 50 by 2025 or 2026. Recall that after two fatal accidents, Boeing stopped delivering Maxes between April 2019 and December 2020.

Widebodies are increasingly scarce as well. Boeing is currently producing a mere three 787s per month, rising to five by year end. It still has a backlog of nearly 100 787s built but not yet delivered. Production quality issues, remember, prevented Boeing from delivering any 787s from May 2021 to August 2022. Airbus, for its part, targets a build rate of nine A350s per month by the end of 2025. It hopes to build four A330neos a month next year. Back on the narrowbody side, it’s been building six A220s a month since early last year, targeting 14 by the “middle of the decade.”

Boeing of course, also has 244 firm orders for its new 777X, itself now several years behind schedule. It ultimately decided not to build a new middle-market aircraft sized between its 737 Max and 787. Why not? More because of stretched resources (as well as cost concerns) rather than lack of interest — on the contrary, lots of airlines were interested. By refraining from a mid-market aircraft, Boeing stands to lose further sales to the wildly popular A321neo, including its extended range LR and XLR variants. The XLR model, however, is — you guessed it — behind schedule; 14 to 16 months behind schedule, according to ALC. Boeing’s closest product size-wise to the A320neo is its 737-10, which still isn’t FAA-certified (United is its biggest buyer). Nor, for that matter, is Boeing’s smaller 737-7 (a plane ordered only by Southwest, WestJet, and Allegiant).  

Will Airbus offer a future upsized -500 version of its A220, a plane that Air France has vocally clamored for? That’s another strategic OEM decision with potential to reshape airline fleet and network strategies (an A220-500 would challenge the 737-8 but also cannibalize the A320neo). For a time, Boeing plotted to attack the smaller narrowbody market by buying control of Embraer’s commercial aircraft business. Shortly after the onset of the pandemic, it backed away from that plan.  

Another big question for the aircraft market involves China. Will it ever buy Boeing planes again? Is Comac, China’s state-owned aircraft producer, a potential challenger to Boeing and Airbus? That’s a longer-term question, as is the future timing of a new generation of narrowbodies. Will supersonic jets return to the commercial skies? Will large passenger aircraft ever fly with hydrogen or some other clean form of power?

In the here and now, airlines just want more planes. The aircraft supply crunch, while arguably helping industry profitability in the short term by driving up yields, is nevertheless frustrating efforts to expand networks, lower unit costs, introduce new seating amenities, and cut carbon emissions. And to be clear, the crunch is making at least some airlines less profitable not more. Ask Hawaiian Airlines about that. Or Go First, if there’s still anyone around to answer.   

Jay Shabat

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By the Numbers

Wait a minute, where’s Air India on this list? Didn’t it just place a massive order? Those planes, 550 of them, are still listed as letters of intent (LOIs). That’s still in any case fewer than United‘s firm order book of 772 planes. United itself also has another 625 options and 350 LOIs, according to Cirium’s fleet data. The probability that an option or LOI eventually turns into a delivery can vary greatly across airlines. Below is a ranking of just what’s under firm contract.

Source: Cirium Fleets Analyzer

Jay Shabat

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